A franchise’s strategy for future growth will not focus just on expanding the system but will also grow its base of company stores.

By Michael Abt

Since the beginning of franchising, one of the big questions facing every leadership team involves company-owned locations. Should we have them or shouldn’t we? What percentage of the system should be company operated vs. franchise operated? Where should we operate them? And on and on.

Of course it’s not unusual for franchise concepts to start with corporate-owned locations. Typically, a new system will open several corporate stores or restaurants in order to prove the concept, develop operating systems and create a working prototype. Just as typically, it often then turns its focus to selling franchises. 

There is certainly nothing wrong with this strategy. It has worked well for hundreds of concepts over time, especially those concepts focused on rapid expansion.

As a former franchisee turned corporate CEO, however, I am a strong advocate that having a portfolio of corporate-owned locations is as important for veteran brands as it is for start-up concepts.  

In my experience, one of the key elements to the long-term success of a franchise system is having a base of corporate-owned and managed locations. And the reasons go well beyond revenue potential.

True Value Will Come

That’s why more than 50 years since the first Huddle House restaurant opened and nearly 400 locations later, we recently opened our 13th corporate location and will continue to grow our company store portfolio through acquisitions and new builds. And although the new company restaurant celebrated the most successful grand opening of a corporate-owned location in our history, we realize that the true value will come in many more ways over the long-term.

First, and perhaps most importantly, it creates an opportunity for us to stay in direct touch with our customers and their wants, their needs and their preferences. This is especially important for a concept such as Huddle House, which targets smaller markets that many other chains mistakenly overlook and features traditional, Southern-inspired comfort food. 

This traditional menu has been at the heart of our success for over five decades and our ability to provide these items on a consistent basis has resulted in the creation of a very faithful and a loyal customer base.

Still, for a mature brand, it can be very tempting to follow the latest trends, especially when trying to expand the market and appeal to new guests. By operating corporate owned restaurants in a variety of markets and locations, we have the flexibility to test new menu items or promotional items and gain immediate feedback on what will work and won’t work before introducing a new item to the franchise system. 

This is how it is possible to keep your products or menu offerings fresh and relevant, introducing items that entice non-users and keep current customers interested and engaged.

Vetting Value

Corporate locations can also prove especially valuable in vetting new procedures, policies and other change to current operations. It can be extremely challenging to convince franchisees that may have been running their operations a certain way for over a decade to change to a new way of doing business.

For example, Huddle House is in the process of implementing new back-office systems, along with a new business intelligence tool and reporting platform. This will be our first fully automated back-office tool and will handle inventory and labor management as well as offer business intelligence and a reporting platform that will allow both single and multi-unit franchise partners to consolidate their daily, weekly, monthly and annual financial information.

Again, these will be tested and proved in both corporate and franchised locations before being introduced to the system. This gives the new system added credibility and allows us to answer their “why should I do this” questions with added authority.

Whether it’s a new menu item or a new operational system, using corporate-owned locations to work out the bugs before launching system-wide helps gain acceptance and buy-in among franchisees. Perhaps the best example of that came about four years ago when Huddle House started plans to rebrand and introduce a new prototype.

While many of its competitors had updated their look over the years, in many places Huddle House had the look of a brand that hadn’t been spruced up in decades. We felt that made the brand irrelevant with younger consumers, and it needed to become more relevant. It was time to give the restaurants a more modern look and feel, which meant a redesign and reconfiguration of the interior, including new seating and signage.

Put Skin in the Game

As anyone involved in franchising knows, implementing any type of major change — especially one involving costly physical updates to the location — is filled with potential for significant push-back from the franchise system. 

In our case, it was critical to assure owners that we didn’t just believe in the potential of the new prototype, but were personally committed to it. That’s why it was introduced in all of the corporate restaurants first.

Once we began to see the dramatic results and had actual metrics, it gave us the confidence to go to our largest franchisees to get their buy-in, and it worked. As they experienced the same results, they helped influence other franchisees to join the program.  

The success at the corporate level also renewed confidence to put more skin in the game by setting aside more than $2 million to fund a financial incentive program for the franchisees that agreed to switch to the new prototype. The $25,000 incentive per location was used to help offset the cost of the restaurant remodel and for local store marketing activities to promote the newly remodeled restaurant.

The results have far exceeded expectations. Already, almost half of the stores in the system reflect the updated image, compared to only six percent four years ago.

From a sales increase standpoint, the top stores are realizing an average increase in average unit volume of more than 20 percent the first year after remodel and additional double-digit increases in the second year.

Brand Building Begins at Home

Another update of the concept is under way that is designed to more than double the AUV through more significant operational changes for new restaurants. This will include a larger footprint as well as optimizing our kitchen design, enhancing operational efficiency, adding additional seating and introducing new cooking platforms and technologies.

And once again, corporate-owned restaurants will play a critical role in proving this new prototype before it is ready to introduce as a franchise option.

That’s why, 50-plus years later, future growth will not just focus on expansion of the franchise system but will also include a strategy to grow the base of company stores, whether through new construction or by acquiring locations from retiring franchise partners. 

Building a strong franchise brand really does begin at home. 

Huddle House CEO Michael Abt got his start in the restaurant industry at age 15. Recently, he was recognized on the Nation’s Restaurant News Reader Picks list of those who are helping shape the future of the restaurant industry for 2016.

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